Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary April 12, 2013

The Economy

The U.S. economy appears to be muddling through, with a weak recent jobs report being counterbalanced by improvement in the manufacturing and service sectors.

On the jobs front, the Labor Department last week said the private sector added just 95,000 jobs in March, a little over a third of what it added in February and a little over half of what it added in January. The unemployment rate (which is calculated using a separate survey) fell, however, to 7.6%. The decline was due to the fact that the number of people not in the labor force increased by 663,000 for the month, meaning that those people were not included as "unemployed" in the headline rate. Many have presumed that means more and more workers are getting discouraged and giving up on getting work. But, the "U-6" unemployment rate, which, unlike the headline number, takes into account people who have given up on looking for a job, fell sharply, to 13.8%. It's unclear why the labor force would decline so much, if discouragement was not the cause. It may simply be that there is a lot of noise in these numbers from month-to-month. We will get a better idea if this is a trend (and, if so, what is behind the trend) with next month's report.

Better news came from the weekly unemployment claims data. New claims are down about 3% since our last newsletter, and are now more than 9% below where they were a year ago.

Other parts of the economy also offered encouragement. The manufacturing sector expanded in March for the fourth straight month, though it did so at a slower pace than the previous two months, according to the Institute for Supply Management. The group's New Orders and Employment sub-indices also both remained in expansion territory, with growth in the former decelerating and growth in the latter accelerating.

The service sector, meanwhile, expanded for the 39th straight month, according to ISM. It said new orders increased and employment conditions improved during the month, though at slower paces than the previous month.

The housing market also continued to provide good news, though the data involved was more dated than the jobs data. According to the latest S&P/Case-Shiller Home Price Indices report, in January, home prices across 20 major U.S. cities jumped a full percentage point, putting them 8.1% above where they were a year ago. That was the biggest year-over-year jump in nearly seven years.

Consumer data was also positive. According to the Commerce Department, personal income rose 1.1% in February and real disposable income rose 0.7%. Consumers increased their spending by 0.3% during the month, which meant that they also increased their personal savings rate by 0.4%.

Since our last newsletter, the S&P 500 returned 1.5%, while the Hot List returned 1.3%. So far in 2013, the portfolio has returned 13.6% vs. 11.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 208.0% vs. the S&P's 59.3% gain.

The Bull Turns Four

Last month, the bull market that began in March 2009 hit its four-year anniversary. Since then, the S&P 500 has kept on pushing higher, eclipsing its pre-Great Recession/Financial Crisis high and closing in on the 1,600 mark.

All of that, plus the seemingly neverending concerns about the global economy, have many wondering whether the bull is nearing its final days. After all, four years does sound like a long time, particularly given the myriad of troubles the world has been confronting lately -- the European debt crisis, U.S. budget sequestration, potential housing market troubles in China.

To get an idea of where we stand in historical terms, I recently looked back at a number of past bull markets (and bears) to get an idea of how this bull stacks up against others. History, they say, doesn't repeat, but it does often rhyme, so the past may let us understand the present and future a bit more clearly.

I looked back at all of the bull markets since 1957, the year that the S&P 500 benchmark came into its current form. The current bull is the tenth bull market since then. For the previous nine, the average duration was right at 48 months -- four years. Five of the nine lasted longer than four years, with the longest being the 1990-2000 bull market, which lasted 115 months.

During those past nine bulls, the S&P gained an average of 165.7%. As of afternoon trading on April 11, the current bull was up 135.9%. (By comparison, bear markets tend to be much shorter in duration and smaller in magnitude than bulls. The average of the last ten bears going back to 1956 was just 15 months, and involved a loss of 34.3%.)

The current bull is thus by no means atypical in terms of how long it has lasted, nor is it atypical in terms of the overall gains it has produced. It has, however, proceeded more rapidly than many post-1956 bulls. For the five previous bulls that lasted at least four years, the average gain through the end of Year 4 was 81.2% Through its first four years, the current bull was up 129.3%. Still, that's not the most rapid rise -- the 1982-87 bull gained 137.6% in its first four years. So again, nothing unheard of with this bull run.

While the current bull is near historical averages in terms of length and magnitude, the real lesson of past bulls isn't that you should expect a bull market to last a particular period or involve a particular level of gain. Instead, the lesson seems to be just how diverse bull markets can be. While the average length of one since 1956 is four years, individual bulls have ranged from 26 months (1966-68) to nearly 10 years (1990-2000). And the range of their gains was even broader: At the low end was that 1966-68 bull, when the market gained 48.0%. At the high end, the 1990-2000 bull gained 417.6%.

There has also been variation in terms of when a bull market (defined as a gain of at least 20% following a bear market, which involves a loss of at least 20%) eclipses its previous high, and, by how much it does so. At their four-year marks, three of the five previous bulls that lasted at least 48 months were at a level above the previous bull market's high. Two (1974-80 and 2002-07) were not. The 1957-61 bull was among those that had beaten its previous high at the four-year mark; it lasted just two more months. The1974-80 bull was still below its previous high after four years; it went on for over two more years.

That might make it seem like it's a bad thing to be above previous highs through Year 4 -- less room left to run, right? Not so fast. The 1990-2000 bull was well above its previous high at the four-year mark, and it went on for another six-plus years, with the S&P surging from 459.04 on its fourth birthday to over 1,500 by the time the bull run was over.

All of this supports the idea that, with so many factors affecting stocks at any given time, getting the timing right on bull and bear markets is incredibly hard, if not impossible. Just because the bull market has been going on for only two years, that doesn't mean it has a long way to go -- had you jumped into stocks just two years into the1966-68 bull, you'd have been met only two months later with a bear market, one in which the S&P would decline more than 36%. On the other hand, just because a bull has gone on for four or five years or six years, that doesn't mean it's due for an end. If you jumped out of stocks at the four-year mark of the 1974-1980 bull market, you'd have missed out on gains of nearly 40% more over the next two years. Had you jumped out at the four-year mark of the 1990-2000 bull, you'd have done even more damage to your portfolio -- the market gained another 230% before the bull ended.

Using other factors to time bulls and bears can also lead to trouble. The 10-year cyclically adjusted price-earnings ratio on the S&P 500 crossed 32 in July of 1997 -- twice its historical average of 16. But while that might seem like a sign to bail on stocks, the S&P rose from under 900 to over 1500 over the next three years or so -- even though the 10-year CAPE stayed above that level 32 mark the whole time. Similarly, the 10-year CAPE fell below that long-term average of 16 in June of 1973, about five months after a bear market had begun. Was that a "buy" signal? Not a very good one. The CAPE kept on falling, and the bear lasted another 16 months or so, with the S&P falling another 40% from the start of June through the October 3, 1974 market bottom.

At the end of the day, given that bull markets tend to last longer and involve far greater gains than bear markets, an investor's best move is more often than not just staying the course and sticking to a long-term strategy through both bears and bulls. That's what Peter Lynch, one of the greatest mutual fund managers of all time, once told PBS. Lynch said that 10% declines in the market had occurred in more than half the years in the 20th century; 25% declines had occurred, on average, every six years. "They're gonna happen," Lynch said. "If you're in the market, you have to know there's going to be declines. And they're going to cap and every couple of years you're going to get a 10% correction. That's a euphemism for losing a lot of money rapidly. And a bear market is a 20-25-30% decline. They're gonna happen. When they're gonna start, no one knows. If you're not ready for that, you shouldn't be in the stock market."

When one of the greatest investors of all time says that no one --not even himself -- knows when bulls and bears are going to start and end, that says something. Trying to time the market, particularly based on individual pieces of data or, even worse hunches or gut feelings, is a very dangerous path for an investor. That's why we prefer to stick with a long-term, disciplined strategy during good times and bad. Yes, that means there will be some rough periods. But historically, the market has followed every bear with a bull --even after the Great Recession and financial crisis a few years ago, despite the fact that many believed financial Armageddon was upon us and stocks were "dead". Plus, the biggest gains often occur in a bull market's early stages, meaning that if you wait until you see a sustained upswing and feel comfortable, you may well miss out on major gains.

All of this is why we will continue to stay disciplined and stick with our long-term strategy, regardless of how long or far a bull market has run, or how long or far a bear market has run. As long as there are fundamentally sound stocks of solid companies out there -- and right now there are plenty -- we'll keep buying them. And over the long haul, I think we'll continue to post some very strong gains despite inevitable short-term ups and downs -- much better gains than the vast majority of those who try to call market tops and bottoms.

Editor-in-Chief: John Reese

Validea Capital Management - Private Portfolio Management Based on Strategies of Legends

Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios.

Get More Information on Validea Capital!

** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such.

The Fallen

As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Starz (STRZA), Jos. A. Bank Clothiers Inc (JOSB), Dollar Tree, Inc. (DLTR) and Lear Corporation (LEA).

The Keepers

6 stocks remain in the portfolio. They are: The Tjx Companies, Inc. (TJX), World Acceptance Corp. (WRLD), Telecom Argentina S.a. (Adr) (TEO), Usana Health Sciences, Inc. (USNA), Royal Dutch Shell Plc (Adr) (RDS.A) and Lukoil (Adr) (LUKOY).

The Newbies

We are adding 4 stocks to the portfolio. These include: Western Digital Corp. (WDC), Statoil Asa(Adr) (STO), Saia Inc (SAIA) and Hollyfrontier Corp (HFC).

Portfolio Changes

Newcomers to the Validea Hot List

HollyFrontier Corp. (HFC): Formed when Holly Corp. merged with Frontier Oil in 2011, Dallas-based HollyFrontier ($10 billion market cap) is one of the U.S.'s largest independent petroleum refiners. It has operations in the Midwest, Southwestern, and Rocky Mountain regions, operating five complex refineries.

HollyFrontier, like other refiners, has been hit hard since proposed cleaner gasoline standards were announced a few weeks back. But my models think investors have overreacted. The stock gets strong interest from my Kenneth Fisher-, Benjamin Graham-, and Joel Greenblatt-based strategies. To read more about its fundamentals, scroll down to the "Detailed Stock Analysis" section below.

Western Digital Corp. (WDC): A big previous winner for the Hot List, gaining 27.7% from late-November to mid-January, this California-based firm is a leader in the hard drive and digital storage business. The 40-year-old company has a market cap of about $12.8 billion, and has raked in $15.6 billion in sales in the past year. It gets strong interest from my Peter Lynch-based model, and high marks from a number of other strategies. For more on the stock, see the "Detailed Stock Analysis" section below.

Statoil ASA (STO): Based in Norway, this integrated oil and gas firm ($78 billion market cap) has operations in three dozen countries across the globe. It has raked in more than $125 billion in sales in the past year.

Statoil gets high marks from my Peter Lynch- and James O'Shaughnessy-based models. For more on the stock, see the "Detailed Stock Analysis" section below.

Saia, Inc. (SAIA): This Georgia-based transportation company offers a range of less-than-truckload, non-asset truckload, and logistic services. It operates 147 terminals in 34 states, and has 8,000 employees across the U.S.

Saia ($600 million market cap) has taken in more than a billion in sales over the past year. It gets strong interest from my James O'Shaughnessy-based strategy. To learn more about it, scroll down to the "Detailed Stock Analysis" section below.

News about Validea Hot List Stocks

Lukoil (LUKOY): Lukoil is buying Hess Corporation's stake in a Russian subsidiary for $1.8 billion, The Wall Street Journal reported on April 1. Hess owns 90% of the subsidiary, Samara-Nafta, while the chairman of Yukos Oil Co., Simon Kukes, owns the other 10%. He will also sell his stake to Lukoil, the Journal stated, adding that total after-tax proceeds for the entire company will be $2 billion.

The TJX Companies (TJX): TJX said on April 2 that it is upping its quarterly dividend by 26%. It also said it plans to continue its stock buyback program by making about $1.3 billion to $1.4 billion of share repurchases in fiscal 2014, the Associated Press reported.

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio

Detailed Stock Analysis

Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer

LUKOY   |   USNA   |   STO   |   TEO   |   WDC   |   RDS.A   |   WRLD   |   HFC   |   SAIA   |   TJX   |  

NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe, as well as Africa. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. As of December 31, 2011, the Company's major shareholder was ING Bank (Eurasia) ZAO with a stake of 75.93%. In April 2013, the Company acquired a 100% of Samara-Nafta ZAO.

USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide.

Statoil ASA (Statoil) is an integrated energy company primarily engaged in oil and gas exploration and production activities. As of December 31, 2011, the Company had business operations in 41 countries and territories. Effective from January 1, 2011, the Company's segments were Development and Production Norway; Development and Production International; Marketing, Processing and Renewable Energy; Fuel & Retail, Other. As of 31 December 2011, the Company had proved reserves of 2,276 million barrels (mmbbl) and 3,150 billion cubic meters (bcm) (equivalent to 17,681 trillion cubic feet (tcf)) of natural gas, corresponding to aggregate proved reserves of 5,426 mmboe. In June 2012, the Company divested its 54% interest in Statoil Fuel & Retail ASA to Alimentation Couche-Tard.

Telecom Argentina SA, (Telecom), is an Argentina-based company primarily engaged in the provision of national fixed-line telecommunication services, international long-distance service, data transmission and Internet services, as well as mobile telephony. The Company also offers such solutions as online business and Web hosting, virtual private network (VPN), mobile operating systems developed by Microsoft and Blackberry, toll-free telephone numbers, call centers and voice over Internet protocol (VoIP) line, as well as other services mainly aimed at corporate clients. As of December 31, 2012, the Company owned its subsidiaries structured in two business segments, Fixed Telephony, which comprised Telecom Argentina USA Inc and Micro Sistemas SA; and Mobile Services, with Telecom Personal SA, Nucleo SA and Springville SA.

Western Digital Corporation (WD) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. Effective March 8, 2012, it acquired Viviti Technologies Ltd. In May 2012, the Company completed the divestiture of certain 3.5-inch hard drive assets to Toshiba Corporation. As part of its deal with Toshiba, WD also completed its purchase of Toshiba Storage Device (Thailand) Company Limited (TSDT), which manufactured hard drives.

Royal Dutch Shell plc (Shell) is an independent oil and gas company. The Company owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream International and Upstream Americas, which are engaged in searching for and recovering crude oil and natural gas; the liquefaction and transportation of gas; the extraction of bitumen from oil sands that is converted into synthetic crude oil, and wind energy. Downstream is engaged in manufacturing; distribution and marketing activities for oil products and chemicals. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shells self-insurance activities.

World Acceptance Corporation operates a small-loan consumer finance business in 12 states and Mexico. The Company is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. As of March 31, 2012, the Company offered standardized installment loans through 1,137 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico. The Company serves individuals with limited access to consumer credit from banks, credit unions, other consumer finance businesses and credit card lenders. In the United States offices, the Company also offers income tax return preparation services to its customers and others.

HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries.

Saia, Inc. (Saia) is an asset-based trucking company that provides regional and interregional less-than-truckload (LTL) services and selected longer haul LTL, along with limited truckload (TL) service solutions to a base of customers and industries across the United States, including the retail, chemical and manufacturing industries through its wholly owned regional transportation subsidiary, Saia Motor Freight Line, LLC (Saia Motor Freight). Saia Motor Freight is a multi-regional LTL carrier that serves 34 states in the South, Southwest, Midwest, Pacific Northwest and West. Saia Motor Freight specializes in offering its customers a range of regional and interregional LTL services, including time-definite and expedited options. Saia Motor Freight primarily provides its customers with solutions for shipments between 100 and 10,000 pounds. In July 2012, the Company acquired Robart Transportation, Inc. and its subsidiary, The RL Services Group, LLC (the Robart Companies).

The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer.

Watch List

The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks.


The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.